What is it about?
Free cash flows are considered sources of agency problems; that is, catalysts for wasteful spending or investments within corporations by professional managers or entrepreneurs. In this study, I find extreme realizations of free cash flows can be associated with productivity losses independent of agency problems. My finding that productivity losses induced by free cash flows occur within contexts characterized by relatively high marginal productivity provides evidence that productivity losses are not derived from relatively low ability.
Why is it important?
This study provides evidence which demonstrates free cash flows need not be sources of agency problems. Empirical evidence that productivity losses derived from free cash flows are not replicable using capital structure choices or the marginal cost of debt further demonstrates free cash flows can affect productivity independent of market frictions, imperfections, or risk profiles. Coupled with evidence that moderate levels of free cash flows are beneficial for productivity, in aggregate study findings question the traditional assumption and findings that free cash flows are sources of agency problems.
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This page is a summary of: Farm Data, Agency Problems, and Free Cash Flow Theory, SSRN Electronic Journal, January 2015, Elsevier,
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